Is It Hard to Get a Personal Loan?

Personal loans allow you to borrow a single lump sum, which is repaid over time in monthly installments. The ease of getting one largely depends on your creditworthiness and financial stability. Interest rates and terms vary, making it crucial to shop around.

Individuals often apply for personal loans to consolidate debt, finance home improvements, cover medical bills, or manage unexpected expenses. The versatility of personal loans makes them a popular choice for immediate funding needs or to help streamline finances.

This article will explore how hard it is to get a personal loan, considering different borrower profiles and requirements.

How hard is it to get a personal loan? 

The ease of getting a personal loan largely hinges on lenders assessing two main criteria: your ability to repay the personal loan and your willingness to do so. These factors capture your financial stability and creditworthiness. The stronger these factors, the easier it is to get a loan.

Lenders tend to adjust their personal loan approval criteria in response to economic or market shifts, tightening or loosening their requirements based on the broader financial climate. Economic downturns may prompt lenders to heighten their criteria to mitigate risk. 

Conversely, during economic stability or growth phases, the criteria might be relaxed, facilitating easier approval. This strategy enables lenders to balance risk while adapting to the economic environment and market changes.

No matter what’s happening in the economy, lenders want to ensure you can repay the financing you receive. Building strong financial stability and creditworthiness makes getting the financing you need easier and less expensive.

Ask the expert

Crystal Rau

CFP®

If cash flow (the difference between income and expenses) is a concern, look at what payments you can eliminate by rolling those debts over to a personal loan. Compare the personal loan payment versus your current payments—will it help or hurt? Increasing your cash flow allows you more flexibility to make extra payments toward the personal loan or relieve the burden of juggling multiple payments and lenders.

When is it hard to get a personal loan?

Getting a personal loan with poor credit scores, low income or unstable employment, and a high debt-to-income (DTI) ratio is challenging. These factors signal to lenders a higher risk of default, making them hesitant to approve loan applications.

Here is a closer look at these criteria, their impact on your personal loan eligibility, and what to do if you find yourself in this situation.

Criteria	Impact	What to do
Poor credit score	Signals a borrower’s past financial difficulties and a higher risk of defaulting on a new loan	Improve credit score, consider secured loan
Low or unstable income	Signals that the borrower is less able to sustain regular loan payments	Prove reliable income through a spouse or cosigner, supplement your income
High DTI ratio	Raises doubts about your ability to repay additional debt	Reduce existing debt or increase income

Poor credit score

A credit score represents your creditworthiness, ranging from 300 to 850. A poor credit score of less than 580 reflects financial struggles, indicating to lenders a history of missed payments, defaults, or bankruptcy.

What to do if you’re in this situation

Improving your credit score is pivotal. Begin by consistently paying bills on time, as payment history significantly impacts your score. You can also work to reduce your overall debt levels, which can positively affect your credit utilization ratio, another critical factor in your credit score. 

Additionally, consider obtaining a secured loan, which requires collateral but often offers more lenient approval criteria, or finding a co-signer with a strong credit history to increase the likelihood of approval. 

Low income or unstable employment

Lenders seek assurance that borrowers have sufficient income and steady employment to manage loan repayments effectively. An unstable employment history or low income may signal to lenders that you are less able to sustain regular loan payments.

What to do if you’re in this situation

Try to provide proof of a stable income through other means, such as documentation of a spouse’s income or other reliable income sources. Alternatively, look for a more stable job or supplemental income opportunities.

High debt-to-income ratio

Your debt-to-income (DTI) ratio is another critical metric lenders use to assess how much of your monthly income is consumed by debt payments. Ideally, lenders prefer a DTI ratio of 36% or less, although some may accept higher ratios of up to 43%. 

A high DTI ratio, especially one that exceeds 43%, can be a concern for lenders because it signals that a significant portion of your monthly income is already allocated to debt obligations, raising doubts about your ability to manage and repay additional debt. 

This can make lenders hesitant to approve a new loan, fearing that the added financial burden might lead to payment difficulties or default

What to do if you’re in this situation

Lowering your DTI ratio is essential to improving your chances of loan approval. You can do this by reducing your existing debt, which lowers your monthly debt obligations and, in turn, your DTI ratio. 

Alternatively, increasing your income through a higher-paying job, additional part-time work or side gigs can also effectively lower your DTI ratio by increasing your income, which is the denominator of the DTI calculation. 

Both strategies can make you a more attractive applicant and contribute to a healthier financial standing, enabling you to manage your debt more effectively.

When is it easy to get a personal loan?

A personal loan is easier to get with good-to-excellent credit scores, stable income or employment, and a low debt-to-income (DTI) ratio. These factors demonstrate to lenders a low risk of default and a solid ability to repay the loan, making a compelling case for lenders to approve a personal loan application.

Criteria	Impact
Credit score of 670+	Shows lenders you’re at less risk of defaulting
Stable income	Financial security shows you can make payments
Low DTI	Indicates your budget isn’t overextended

Good-to-excellent credit score

A good-to-excellent credit score of 670 or better indicates a history of responsible credit usage and timely repayments. Borrowers with higher credit scores are often seen as less risky, making lenders more inclined to offer favorable loan terms.

Stable income and employment

A stable job and consistent income give lenders confidence in your ability to repay a personal loan. This stability suggests financial security, reducing the perceived risk of lending to you.

Low DTI ratio

A low DTI ratio of no more than 36% to 43% indicates a healthy balance between your debt and income. It shows lenders that you are not overextended, making you a more attractive candidate for a loan.

Does a personal loan fit your broader financial plan? 

A personal loan can complement your broader financial plan if used thoughtfully, such as for debt consolidation or to cover essential expenses. However, it’s crucial to assess how its repayments mesh with your budget and financial objectives.

Crafting a precise budget is vital. Pinpoint your monthly income and outflows to gauge how a loan payment fits. This step ensures the loan amount and term align with what you can comfortably afford to pay without straining your finances.

Additionally, do your best to establish an emergency fund before assuming new debt. Aiming for a cushion that spans three to six months of expenditures safeguards your ability to manage loan payments, even in unforeseen financial downturns.

Finally, strategize your loan repayment. Opt for automatic loan payments to avoid late fees and safeguard your credit score. Furthermore, accelerating your loan repayment may reduce your total interest costs, making the financing more affordable in the long run.

Tip

Read your loan agreement carefully to ensure you can repay the loan quicker without being charged a fee. Some loans require you to pay a prepayment penalty if you repay the loan faster, which can offset some of your potential interest savings. 

Ask the expert

Crystal Rau

CFP®

To feel comfortable in your budget and to ensure a personal loan fits your budget, ensure that your new personal loan payment plus your other additional debt payments (including a mortgage) do not exceed 30% to 35% of your net income. While it is doable, it will be a very restrictive budget until your debt is paid off.

How to get a personal loan

Getting a personal loan involves several steps: prequalification, comparing offers, formally applying, and finally receiving the funds. Each step will help you secure a loan that aligns with your financial needs.

You can get a personal loan by following these steps:

1. Prequalify: Kick off the process by shopping for prequalification with several lenders, a step that typically takes minutes to a few days. This involves a soft credit inquiry, which gives you a preview of potential loan terms without affecting your credit score.
2. Compare offers: Spend a few hours to a week analyzing different lenders’ interest rates, terms, and fees. This critical comparison, focusing on the total cost of the loan, helps ensure you find the most favorable deal.
3. Formally apply: After selecting the best offer, formally apply with your chosen lender. This stage, which includes a hard credit check and documentation submission, can vary from several hours to a week, depending on the lender.
4. Receive funds: Once your loan is approved and you’ve signed the personal loan agreement, your lender will disburse the loan funds to you. This final step can be as quick as the same day or take up to a week.

This entire process, from initial prequalification to the moment you access the loan funds, can span from a few days to several weeks, offering ample opportunity to secure the best possible loan for your situation.

Alternatives if it’s too hard to get a personal loan

Several alternatives to personal loans might be worth your consideration depending on your financial situation and needs. 

Secured loans

Unlike personal loans, most of which are unsecured, secured loans require collateral. Placing your assets as collateral can make these loans less risky for the lender, but it poses a potential risk to your property if you fail to make repayments.

Credit builder loans

If you’re looking to improve your credit score, credit builder loans can be an ideal choice. These loans put the loan amount in a locked savings account, which is released to you once you complete the loan payments. They differ from personal loans, which give you immediate access to funds.

Payday alternative loans

These are short-term loans some federal credit unions offer as an alternative to expensive payday loans. They can have low limits but generally carry lower fees compared to personal loans.

Cosigned or co-borrowed loans

If you have weak credit, a cosigner or co-borrower with strong credit can help you secure a personal loan at a better interest rate. The cosigner is equally responsible if you fail to repay, and a co-borrower agrees to share responsibility for repayment.

Peer-to-peer (P2P) lending

P2P lending matches borrowers and investors. It can be worthwhile if you seek a more personalized lending experience, but the interest rates can be higher or similar to those of personal loans.

Family or friends

Borrowing from family or friends can be an easy, interest-free alternative to a personal loan. However, it could strain relationships if you can’t repay as agreed.

Credit union loans

Many credit unions offer lower interest rates than banks or online lenders. You could score a cheaper personal loan here, but most credit unions require membership.

Paycheck advance

Some employers or apps offer paycheck advances without charging the interest you’d incur with a personal loan. This option just pulls forward your own money, which could leave you short later.

FAQ

What are the typical interest rates for personal loans?

Interest rates for personal loans can range from  6% to 36%, depending on factors including your credit score, loan amount, loan term, and the lender’s policies.

Can I get a personal loan with a bad credit score?

Securing a personal loan with a bad credit score can be challenging, but it’s not impossible. Some lenders specialize in offering loans to individuals with lower credit scores—often at higher interest rates to offset the increased risk.

How much can I borrow with a personal loan?

Personal loan amounts can vary based on the lender, your creditworthiness, and your income. You might be able to borrow anywhere from a few hundred dollars to $100,000.

What documents do I need to apply for a personal loan?

To apply for a personal loan, you’ll likely need proof of identity, proof of income, and a credit check. Some lenders may also require additional financial records or documentation.

How long does it take to get approved for a personal loan?

The time it takes for personal loan approval varies by lender. Some online lenders can approve your loan within minutes. Traditional banks may take a few days or even a week.

Can I pay off my personal loan early?

Some lenders allow you to repay your personal loan early without penalties. However, others may charge prepayment fees. Always check the lender’s terms and conditions beforehand.